2023 (8) TMI 162 - HC - Income Tax

Search & Seizure Invalid: Revenue's Failure to Produce Note Results in Quashing Criminal Case

The Court held that due to the Revenue's failure to produce the satisfaction note, the search and seizure action, block assessment order, penalty, and ... Block assessment u/s 158BC - penalty levied u/s 158BFA - offences allegedly committed under section 276C and 277 r.w.s. 278B - HELD THAT:- Since the satisfaction note which formed the very basis for issuance and authorisation of the search warrant u/s 132(1) has not been made available in spite of a specific direction given by the Tribunal way back on 17.06.2002 and repeated by this Hon’ble Court on 30.06.2023 an adverse inference needs to be drawn in respect of the same especially having regard to the circumstances set out hereinbefore. Since, the Revenue has failed to produce the satisfaction note we have to and we hereby hold that the search action u/s 132(1) and, consequently, the block assessment order dated 31.12.1999 passed u/s 158BC, the order dated 04.10.2001 levying penalty u/s 158BFA and the Criminal Case filed by the Revenue before the 4th Court of the Additional Chief Metropolitan Magistrate at Esplanade Mumbai, which is now pending as renumbered Criminal Case before 38th Court of Additional Chief Metropolitan Magistrate cannot survive as they are all predicated on the existence of a valid search. The complaint being Criminal Case before 38th Court of Additional Chief Metropolitan Magistrate is quashed. Undoubtedly the contention of the Revenue that, even assuming that the search is to be held invalid the information or material gathered during the course thereof may be relied upon by them for making adjustment to the Assessee’s income in an appropriate proceeding has merit. Assessee disputes that no new information or material has been gathered by the Revenue in the present case other than what is already available in its books of account, it is clarified that this order does not preclude the Revenue from taking any such proceedings as they may be so advised and to utilise the information or material in such proceeding against the assessee as is permissible in law. ISSUES PRESENTED AND CONSIDERED 1. Whether the pre-conditions in section 132(1) - including existence of a recorded satisfaction (reasons to believe) - were fulfilled before conducting the search and seizure. 2. Whether the Tribunal had jurisdiction to direct production of the record containing the satisfaction note and whether non-production after such direction attracts adverse inference. 3. Effect of non-production (and alleged destruction) of the satisfaction note on the validity of the search and seizure, the consequent block assessment under section 158BC, penalty under section 158BFA and criminal prosecution under sections 276C/277 read with 278B. 4. Whether, if the search is held invalid, the Revenue may nonetheless rely upon information/material found during the search in subsequent or other proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of recorded reasons for exercise of power under section 132(1) Legal framework: Section 132(1) authorises search and seizure only upon fulfillment of statutory pre-conditions, which include formation of a belief/reasons to believe. The power is a serious intrusion on privacy and must be exercised strictly in accordance with law. Precedent treatment: The Court relied on settled principles, including the apex court's exposition that reasons for belief must be placed before the Court when formation of belief is challenged and that the Court may examine existence and relevance of information underlying the belief though not its sufficiency. Interpretation and reasoning: The Court emphasised that recorded reasons (satisfaction note/reasons to believe) constitute the foundation of the condition precedent for the exercise of search powers; absence of such record renders the action illegal. The Court reiterated that scrutiny is limited to whether the recorded reasons exist, are rationally connected to formation of belief, and are free from mala fides or use of extraneous material; courts do not probe adequacy in writ jurisdiction. Ratio vs. Obiter: Ratio - existence of recorded reasons is a condition precedent; Court may examine whether recorded reasons are actuated by mala fides or irrelevant considerations. Obiter - general observations about the serious nature of the power and the possibility of roving/fishing enquiries (consistent with authority cited). Conclusion: The statutory requirement of a recorded satisfaction/reasons to believe is essential; absence invalidates the exercise of power under section 132(1). Issue 2 - Tribunal's power to direct production of the satisfaction note and adverse inference on non-production Legal framework: Appellate/tribunal bodies have power to require production of material relevant to a jurisdictional challenge; where such material is ordered produced and not produced, adverse inference may be justified. Precedent treatment: The Court followed prior authority that reasons forming part of the satisfaction note must be placed before the High Court on challenge; this principle supports tribunal directions for production. Interpretation and reasoning: The Tribunal's direction (17.06.2002) to produce the satisfaction record was proper because the ground raised was fundamental to jurisdiction. The Revenue's long non-compliance (near six years) and the subsequent unexplained inability to locate the satisfaction note (including a belated claim of fire destruction in 2018) justified the Court's direction to file the reasons in sealed envelope and the drawing of an adverse inference for non-production. The Court treated non-production after clear orders as materially prejudicial to establishment of lawful exercise of power. Ratio vs. Obiter: Ratio - a tribunal may direct production of the satisfaction note where jurisdiction is in issue and persistent non-production may attract adverse inference. Obiter - observations on timing and custodian responsibilities of Revenue records (contextual). Conclusion: The Tribunal was empowered to order production; persistent non-production justified adverse inference and the Court's directive to produce reasons in a sealed envelope, failing which adverse consequences follow. Issue 3 - Consequences of non-production of satisfaction note: validity of search, block assessment, penalty and prosecution Legal framework: A valid search under section 132(1) is prerequisite to sustain proceedings and orders that flow from it (block assessment under section 158BC, penalty under section 158BFA, and prosecutions based on the block assessment). Where the foundational legality is vitiated, consequential orders are vulnerable to quashing. Precedent treatment: The Court applied settled law that if conditions for exercise of search power are not satisfied, the proceedings initiated therefrom are liable to be quashed. Interpretation and reasoning: Given failure to produce the satisfaction note despite multiple directions (Tribunal and High Court) and the unexplained delay and after-the-fact account of record destruction, the Court drew an adverse inference that the foundational record either did not exist or could not justify the search. Because the block assessment, penalty order and criminal complaint were all predicated on the search, they could not survive independent of a valid search. The Court therefore quashed the search and all consequential orders/proceedings including the criminal complaint then pending before the Magistrate. Ratio vs. Obiter: Ratio - where no satisfactory proof of the requisite recorded reasons exists after judicial directions, the search (and consequential orders and prosecution predicated solely on it) must be quashed. Obiter - comments on the chronology of record loss and administrative custody (contextual to adverse inference). Conclusion: Non-production warranted quashing of the search; accordingly the block assessment, penalty and criminal complaint founded on the search were quashed. Issue 4 - Permissibility of using information/material from an invalid search in other proceedings Legal framework: Distinct legal principle that, even if a search is invalid, the Revenue in appropriate proceedings may rely upon information or material lawfully admissible under law, subject to statutory/constitutional constraints and evidentiary rules. Precedent treatment: The Court acknowledged the Revenue's contention (and existing law) that information/material gathered may be used in suitable proceedings notwithstanding invalidity of the search; this is a recognized limitation on the effect of quashing. Interpretation and reasoning: The Court clarified that its order quashing the search and consequential proceedings does not preclude the Revenue from initiating or pursuing other proceedings in which it may lawfully utilise information or material as permitted by law, nor does it resolve whether new proceedings are maintainable in any particular factual matrix. The Assessee's assertion that no new material was in fact gathered was noted but not adjudicated beyond the declared right of Revenue to act as permitted by law. Ratio vs. Obiter: Ratio - quashing of search does not automatically bar Revenue from using information/material in other proceedings if permissible by law. Obiter - observations on the Assessee's contention about absence of new material (factual). Conclusion: The quashing does not preclude Revenue from taking other proceedings and using information/material to the extent permissible in law; the present orders only invalidate the search and proceedings directly founded on it. Ancillary directions and disposition The Tribunal was directed to dispose of the pending appeal in terms of the Court's order within 12 weeks; both petitions were disposed accordingly. These procedural directions flow from the primary conclusions above and are consequential to the quashing of the search and dependent orders.